RADIAN GROUP INC. The disclosures in this quarterly report are complementary to those made in our 2020 Form 10-K and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report, as well as our audited financial statements, notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K. The following analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2021 provides information that evaluates our financial condition as ofSeptember 30, 2021 compared withDecember 31, 2020 and our results of operations for the three and nine months endedSeptember 30, 2021 , compared to the same period last year. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements-Safe Harbor Provisions" above, and "Item 1A. Risk Factors" in our 2020 Form 10-K for a discussion of those risks and uncertainties that have the potential to adversely affect our business, financial condition, results of operations, cash flows or prospects. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. See "Overview" and Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Index to Item 2 Item Page Overview 40 Key Factors Affecting Our Results 44 Mortgage Insurance Portfolio 45 Results of Operations-Consolidated 48 Results of Operations-Mortgage 52 Results of Operations-homegenius 58 Results of Operations-All Other 59 Liquidity and Capital Resources 60 Critical Accounting Estimates 64
Overview
We are a diversified mortgage and real estate business with two reportable
business segments-Mortgage and homegenius. Our Mortgage segment provides
credit-related insurance coverage, principally through private mortgage
insurance on residential first-lien mortgage loans, as well as other credit risk
management, contract underwriting and fulfillment solutions, to mortgage lending
institutions and mortgage credit investors. Our homegenius segment offers a
broad array of title, valuation, asset management, SaaS and other real estate
services to mortgage lenders, mortgage and real estate investors, GSEs, real
estate brokers and agents.
Our homegenius segment was previously named "Real Estate" and during the second
quarter of 2021 we renamed it "homegenius" to align with updates to our branding
strategy for the segment's products and services. As further discussed in Note 4
of Notes to Unaudited Condensed Consolidated Financial Statements, the
homegenius segment name change had no impact on the composition of our segments
or on our previously reported historical financial position, results of
operations, cash flow or segment level results.
Current Operating Environment
As a seller of mortgage credit protection and other mortgage and credit risk
management solutions, our Mortgage business results are subject to macroeconomic
conditions and other events that impact the housing, real estate and housing
finance markets, the credit performance of our underlying insured assets and our
future business opportunities, including the current global pandemic as well as
seasonal fluctuations that specifically affect the mortgage origination
environment. The macroeconomic conditions, seasonality and other events that
impact the housing, mortgage finance and related real estate markets also affect
the demand for our products and services offered through our homegenius segment.
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Glossary
Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The unprecedented and continually evolving social and economic impacts
associated with the COVID-19 pandemic on the U.S. and global economies that
began in early 2020 had a negative effect on our business and our financial
results for the second quarter of 2020, and since then to a lesser extent. See
"-COVID-19 Impacts" below for further discussion of the impacts on our business
associated with the COVID-19 pandemic.
Despite the effects of the COVID-19 pandemic, we wrote record levels of NIW in
2020, totaling $105.0 billion . In the first nine months of 2021 we wrote NIW of
$68.2 billion , a decrease of 9% compared to our NIW in the first nine months of
2020. We continue to believe that the long-term housing market fundamentals and
outlook remain positive, including low interest rates, demographics supporting
growth in the population of first-time homebuyers and a relatively constrained
supply of homes available for sale. However, the low interest rate environment
in recent periods has also resulted in an increase in policy cancellations
associated with the high level of refinance activity, which has reduced our
Persistency Rate, and in turn contributed to a reduction in our IIF,
particularly as a result of a decline in our Single Premium Policies. In the
second quarter of 2021 this refinance activity began to moderate, and this trend
has continued in the three months ended September 30, 2021 . See "Mortgage
Insurance Portfolio" for additional details on our NIW and IIF.
In recent years, Radian and other participants in the private mortgage insurance
industry have engaged in a range of risk distribution transactions and
strategies and implemented enhanced risk-based pricing frameworks, which we
believe have helped increase the financial strength and flexibility of the
mortgage insurance industry by mitigating credit risk and financial volatility
through varying economic cycles. As of September 30, 2021 , 63% of our primary
RIF is subject to a form of risk distribution and our estimated reinsurance
recoverables related to our mortgage insurance portfolio were $74.7 million . Our
use of risk distribution structures has reduced our required capital and
enhanced our projected return on capital, and we expect these structures to
provide a level of credit protection in periods of economic stress.
COVID-19 Impacts
The COVID-19 pandemic has created periods of significant economic disruption,
high unemployment, volatility and disruption in financial markets, and required
adjustments in the housing finance system and real estate markets. In addition,
the pandemic has resulted in travel restrictions, temporary business shutdowns,
and stay-at-home, quarantine, and similar orders, all of which contributed to a
rapid and significant rise in unemployment that peaked in the second quarter of
2020. Since then, businesses have been reopening, and unemployment levels have
declined from their peak, but numerous limitations, such as extensive health and
safety measures and overall supply constraints and labor shortages, continue to
limit operations. Unemployment levels also remain elevated compared to
pre-pandemic levels, and may remain elevated or may rise if the current economic
disruption is prolonged.
As a result of the COVID-19 pandemic and its impact on the economy, including
the significant increase in unemployment, we experienced a material increase in
new defaults in 2020, substantially all of which related to defaults of loans
subject to forbearance programs implemented in response to the COVID-19
pandemic. Beginning in the second quarter of 2020, the increase in the number of
new mortgage defaults resulting from the COVID-19 pandemic has had a negative
effect on our results of operations and our reserve for losses. See Note 11 of
Notes to Unaudited Condensed Consolidated Financial Statements for additional
information on our reserve for losses.
Our primary default rate was 3.4% at September 30, 2021 , down from a peak at
June 30, 2020 of 6.5%, which was elevated by the material increase in new
defaults in the three months ended June 30, 2020 . Favorable trends in the number
of new defaults and Cures were the primary drivers of the decline in our default
inventory and default rate, compared to their peaks at June 30, 2020 . The
number, timing and duration of new defaults and, in turn, the number of defaults
that ultimately result in claims will depend on a variety of factors, including
the scope, severity and duration of the COVID-19 pandemic, the resulting impact
on the economy, including with respect to unemployment and housing prices, and
the effectiveness of forbearance and other government efforts such as financial
stimulus programs, to provide long-term economic and individual relief to assist
homeowners. Consequently, the number and rate of total defaults is difficult to
predict and will depend on the foregoing and other factors, including the number
and timing of Cures and claims paid and the net impact on IIF from our
Persistency Rate and future NIW. See "Item 1A. Risk Factors" in our 2020 Form
10-K for additional discussion of these factors and other risks and
uncertainties.
Increases in new defaults may affect our ability to remain compliant with the
PMIERs financial requirements. Once two missed payments have occurred on an
insured loan, the PMIERs characterize the loan as "non-performing" and require
us to establish an increased Minimum Required Asset factor for that loan
regardless of the reason for the missed payments. During the COVID-19 Crisis
Period, pursuant to the COVID-19 Amendment that amends the PMIERs, a Disaster
Related Capital Charge that effectively reduces the Minimum Required Asset
factor by 70% has been applied nationwide to all COVID-19 Defaulted Loans for no
longer than three calendar months beginning with the month the loan becomes
non-performing (i.e., missed two monthly payments), or if greater, the period of
time that the loan is subject to a forbearance plan, repayment plan or loan
modification trial period granted in response to a financial hardship related to
COVID-19. Under the terms of the COVID-19 Amendment, the COVID-19 Crisis Period
ended March 31, 2021 . As a result, after March 31, 2021 the Disaster Related
Capital Charge is no longer being applied to all new defaults, and instead is
only being applied to new defaults if they are subject to a COVID-19 forbearance
plan, regardless of whether the forbearance plan was entered into before or
after the expiration of the COVID-19 Crisis Period. See "-COVID-19 Amendment to
PMIERs" below for more information.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The application of the Disaster Related Capital Charge reduces the total amount
of assets that Radian Guaranty otherwise would be required to hold against
COVID-19 Defaulted Loans under the PMIERs. The reduction in Radian Guaranty's
Minimum Required Assets from this Disaster Related Capital Charge was
approximately $336 million as of September 30, 2021 , compared to approximately
$650 million at December 31, 2020 . Inclusive of this benefit in both periods,
Radian Guaranty's PMIERs Cushion increased to $1.7 billion as of September 30,
2021 , from $1.3 billion as of December 31, 2020 . While we expect Radian Guaranty
to continue to maintain its eligibility status with the GSEs, there are possible
scenarios in which the number of new defaults could impact Radian Guaranty's
ability to comply with the PMIERs financial requirements. See "Item 1A. Risk
Factors-Radian Guaranty may fail to maintain its eligibility status with the
GSEs, and the additional capital required to support Radian Guaranty's
eligibility could reduce our available liquidity" in our 2020 Form 10-K.
As further described in this report, we have experienced increased financial
requirements under the PMIERs as a result of new defaults related to the
COVID-19 pandemic, lower Persistency Rates due to a low interest rate
environment and increased reserves for losses due to the higher number of new
defaults. See Note 1 of Notes to Unaudited Condensed Consolidated Financial
Statements in this report and "Item 1A. Risk Factors-The COVID-19 pandemic has
adversely impacted us, and its ultimate impact on our business and financial
results will depend on future developments, which are highly uncertain and
cannot be predicted, including the scope, severity and duration of the pandemic
and actions taken by governmental authorities in response to the pandemic" in
our 2020 Form 10-K for additional information.
Legislative and Regulatory Developments
We are subject to comprehensive regulation by both federal and state regulatory
authorities. For a description of significant state and federal regulations and
other requirements of the GSEs that are applicable to our businesses, as well as
legislative and regulatory developments affecting the housing finance industry,
see "Item 1. Business-Regulation" in our 2020 Form 10-K. Except as discussed
below, there were no significant regulatory developments impacting our
businesses from those discussed in our 2020 Form 10-K.
COVID-19 Amendment to PMIERs
In 2020, in response to the COVID-19 pandemic, the GSEs issued guidelines
("National Emergency Guidelines") that became effective June 30, 2020 and, among
other things, adopted the COVID-19 Amendment to the PMIERs to apply a Disaster
Related Capital Charge nationwide to certain non-performing loans that we refer
to as COVID-19 Defaulted Loans, which comprise non-performing loans that either:
(i) have an Initial Missed Payment (discussed below) occurring during the
COVID-19 Crisis Period or (ii) are subject to a forbearance plan granted in
response to a financial hardship related to COVID-19 (which is assumed under the
COVID-19 Amendment to be the case for any loan that has an Initial Missed
Payment occurring during the COVID-19 Crisis Period and is subject to a
forbearance plan), the terms of which are materially consistent with the terms
of forbearance plans offered by the GSEs.
The Disaster Related Capital Charge effectively reduces the Minimum Required
Asset factor that applies to COVID-19 Defaulted Loans in recognition of the fact
that these loans generally have a higher likelihood of curing. Under the
COVID-19 Amendment, the Disaster Related Capital Charge applies for three
calendar months beginning with the month the loan becomes non-performing (i.e.,
missed two monthly payments), or if greater, the period of time that the loan is
subject to a forbearance plan, repayment plan or loan modification trial period
granted in response to a financial hardship related to COVID-19.
Under the terms of the COVID-19 Amendment, the COVID-19 Crisis Period ended
March 31, 2021 . As a result, as of April 1, 2021 the Disaster Related Capital
Charge is no longer applied to all new defaults, and instead is applied only to
new defaults if they are subject to a COVID-19 forbearance plan, regardless of
whether the forbearance plan was entered into before or after the expiration of
the COVID-19 Crisis Period. The Disaster Related Capital Charge will continue to
be applied to these COVID-19 Defaulted Loans for as long as they remain in the
COVID-19 forbearance plan, repayment plan or loan modification trial period.
Further, pursuant to the National Emergency Guidelines, through June 30, 2021 ,
certain capital preservation measures were instituted that required the consent
of the GSEs for private mortgage insurers, including Radian Guaranty, to: (i)
pay dividends or make payments of principal or increase payments of interest
beyond those commitments made prior to June 30, 2020 associated with the Surplus
Notes; (ii) make any other payments, unless related to expenses incurred in the
normal course of business or to commitments made prior to June 30, 2020 ; (iii)
pledge or transfer asset(s) to any affiliate or investor; or (iv) enter into any
new arrangements or alter any existing arrangements under tax-sharing and
intercompany expense-sharing agreements other than renewals and extensions of
agreements in effect prior to June 30, 2020 (collectively, the "Capital
Preservation Actions").
Effective July 1, 2021 , the National Emergency Guidelines were modified to
extend the capital preservation measures through December 31, 2021 and to
provide an exception that would permit Radian Guaranty and the other private
mortgage insurers to pay dividends and take the other Capital Preservation
Actions without the GSEs' prior consent as long as the private mortgage
insurer's PMIERs Cushion remains above an applicable threshold, as further
described below. From July 1, 2021 through September 30, 2021 , a private
mortgage insurer may pay dividends or take the other Capital Preservation
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Actions without the prior consent of the GSEs as long as its PMIERs Cushion is
50% or greater than its Minimum Required Assets and taking such actions would
not cause its PMIERs cushion to fall below 50% of its Minimum Required Assets as
of the end of the quarter ending September 30, 2021 . From October 1, 2021
through December 30, 2021 , a private mortgage insurer may pay dividends or take
the other Capital Preservation Actions without the prior consent of the GSEs as
long as its PMIERs Cushion is 15% or greater than its Minimum Required Assets
and taking such actions would not cause its PMIERs Cushion to fall below 15% of
its Minimum Required Assets as of the end of the quarter ending December 31,
2021 .
For additional information on the risks associated with the expiration of the
COVID-19 Crisis Period and the capital preservation measures, see "Item 1A. Risk
Factors-Radian Guaranty may fail to maintain its eligibility status with the
GSEs, and the additional capital required to support Radian Guaranty's
eligibility could reduce our available liquidity" and "Radian Group's sources of
liquidity may be insufficient to fund its obligations" in our 2020 Form 10-K.
Change in FHFA Leadership
On June 23, 2021 , following a U.S. Supreme Court decision that determined that
the FHFA director may be removed by the President other than for cause,
President Biden removed FHFA director Dr. Mark Calabria , who was appointed under
the Trump Administration , and appointed Sandra Thompson as acting director of
the FHFA.
Since assuming the role of acting director of the FHFA, Sandra Thompson has
taken a number of actions that represent a reversal of the previous FHFA
leadership's primary focus on preparing the GSEs to exit from conservatorship by
increasing the GSEs' overall capital levels and reducing their credit risk
profile. In contrast, the FHFA under acting director Thompson has been focused
on increasing the accessibility and affordability of mortgage credit, in
particular to low-and-moderate income borrowers and underserved communities. The
FHFA has instituted this change in policy through the following actions:
?In August 2021 , entered into a memorandum of understanding with HUD to
collaborate in addressing fair housing and fair lending;
?In August 2021 , cancelled a 50-basis point adverse market fee on refinance
transactions;
?In September 2021 , suspended limitations set forth in the preferred stock
purchase agreements between the GSEs and U.S. Department of the Treasury that
lifted limitations on GSE purchases loans deemed "high risk," including loans
with multiple higher risk attributes (i.e., LTVs greater than 90%,
debt-to-income ratios greater than 45% and FICO credit scores less than 680);
?In September 2021 , proposed changes to the ERCF to reduce the GSEs' total
capital requirements, including by giving greater credit to credit risk
transfer;
?In October 2021 , raised the area median income limitations from 80% to 100% for
the GSEs' special refinance programs aimed at supporting low-and-moderate income
borrowers' ability to take advantage of the low interest rate environment; and
?In October 2021 , announced that "desktop appraisals," which represent an
alternative to traditional home appraisals, would be incorporated into the GSEs'
guidelines for many new purchases beginning in early 2022.
The recent actions taken by the FHFA and GSEs generally have been viewed as
favorable to the housing market and to mortgage credit for low-and-moderate
income borrowers, which often utilize private mortgage insurance in their home
financing transactions. In this regard, the expansive approach by the GSEs has
been positive for our mortgage insurance business and, although no assurance can
be provided, may continue to provide further opportunities for our products.
However, as discussed under "Item 1A. Risk Factors-Changes in the charters,
business practices, or role of the GSEs in the U.S. housing market generally,
could significantly impact our businesses" in our 2020 Form 10-K, the FHFA could
alter the policy priorities at the FHFA and modify the GSEs' business practices
in ways that also could have a negative impact on our businesses.
Qualified Mortgage (QM) Requirements - Ability to Repay Requirements
Under the Dodd-Frank Act, mortgage lenders must make a reasonable and good faith
determination that, at the time the loan is consummated, the consumer has a
reasonable ability to repay the loan (the "Ability to Repay Rule"). The
Dodd-Frank Act provides that a creditor may presume that a borrower will be able
to repay a loan if the loan has certain low-risk characteristics that meet the
definition of a qualified mortgage, or QM (the "QM Rule"). This QM presumption
is generally rebuttable; however, loans that are deemed to have the lowest risk
profiles are granted a safe harbor from liability ("QM Safe Harbor") related to
the borrower's ability to repay the loan.
In implementing the QM Rule, the Consumer Financial Protection Bureau ("CFPB")
established rigorous underwriting and product feature requirements for loans to
be deemed QMs ("Original QM Definition"), including that the borrower does not
exceed a 43% debt-to-income ratio after giving effect to the loan. As part of
the Original QM Definition, the CFPB also created a special exemption for the
GSEs, which is generally referred to as the "QM Patch," that allows any loan
that meets the GSE underwriting and product feature requirements to be deemed to
be a QM, regardless of whether the loan exceeds the 43% debt-to-income ratio.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In December 2020 , the CFPB finalized two new definitions of QM. One of these new
QM definitions (the "New General QM Definition") is intended to replace the
underwriting focused approach of the Original QM Definition, including the 43%
debt-to-income ratio limitation, with a new pricing-based approach to QM. Under
the New General QM Definition, certain underwriting considerations are retained,
but QM status generally is achieved if the loan is priced at no greater than
2.25% above the Average Prime Offer Rate ("APOR"). Loans priced at or less than
1.5% above APOR are subject to the QM Safe Harbor, while all other QM loans
would receive the general rebuttable presumption that the loans met the ability
to repay standard.
Separately, the CFPB created another new QM definition ("Seasoned QM") for
first-lien, fixed-rate loans that meet certain performance requirements over a
36-month seasoning period and are held in the lender's portfolio until the end
of the seasoning period. Both new QM definitions became effective on March 1,
2021 . The New General QM Definition originally had a mandatory compliance date
of July 1, 2021 , after which the Original QM Definition and QM Patch would no
longer apply. In April 2021 , the CFPB issued a new rule delaying the mandatory
compliance deadline for the New General QM Definition until October 1, 2022 ,
thereby preserving the Original QM Definition and QM Patch until such date.
On April 8, 2021 , the GSEs announced that for loan applications received on or
after July 1, 2021 , they will only purchase loans satisfying the New General QM
Definition. As a result, even though the CFPB has delayed the mandatory
compliance date for the New General QM Definition until October 1, 2022 , for
GSE-acquired loans with applications received on or after July 1, 2021 , the QM
Patch is effectively limited to loans that satisfy the New General QM
Definition. This decision by the GSEs reduced the number of loans that otherwise
would have been designated QM compared to those receiving QM designation under
the QM Patch, although not materially.
For more information regarding the CFPB's proposed New General QM Definition and
the risks it may present for us, see "Item 1A. Risk Factors-A decrease in the
volume of mortgage originations could result in fewer opportunities for us to
write new mortgage insurance business and conduct our Real Estate business" in
our 2020 Form 10-K.
Recent Company Developments
Radian Guaranty expects to enter into a fully collateralized reinsurance
agreement with Eagle Re 2021-2 Ltd. on or about November 9, 2021 . This
reinsurance agreement is expected to provide for up to $484.1 million of
aggregate excess-of-loss reinsurance coverage for the mortgage insurance losses
on new defaults on an existing portfolio of eligible policies with RIF of $10.8
billion that were predominantly issued between January 1, 2021 and July 31,
2021 . Eagle Re 2021-2 Ltd. will finance its coverage by issuing mortgage
insurance-linked notes to eligible capital markets investors in the amount of
$484.1 million in an unregistered private offering that priced on October 29,
2021 and is expected to close on or about November 9, 2021 , subject to customary
conditions. For additional information about our existing reinsurance
arrangements, see Note 8 of Notes to Unaudited Condensed Consolidated Financial
Statements.
During the second quarter of 2021, in response to the COVID-19 pandemic and
Radian's successful transition to a virtual work environment, we made the
decision to exit, and to actively market for sublease, all office space in our
former corporate headquarters. As part of this change, we also entered into a
new lease with reduced square footage at another Philadelphia area location,
which offers flexible, virtual and hybrid work arrangements to our employees. In
September 2021 , we designated the location as our new corporate headquarters.
See Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements for
additional information, including details on related impairments.
Key Factors Affecting Our Results
The key factors affecting our results are discussed in our 2020 Form 10-K. There
have been no material changes to these key factors.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Mortgage Insurance Portfolio
IIF by origination vintage (1)
[[Image Removed: rdn-20210930_g2.jpg]]
Insurance in Force as of:
Vintage written in: September 30, December 31, 2020 September 30,
($ in billions) 2021 2020
¢ 2021 $66.1 27.4 % $- - % $- - %
¢ 2020 80.1 33.1 98.8 40.2 73.0 29.8
¢ 2019 27.7 11.5 44.6 18.1 51.8 21.1
¢ 2018 14.2 5.9 23.5 9.5 28.1 11.4
¢ 2017 13.1 5.4 21.2 8.6 25.3 10.3
¢ 2016 11.4 4.7 17.5 7.1 20.7 8.4
¢ 2009 - 2015 16.8 7.0 25.7 10.5 30.5 12.4
¢ 2008 & Prior (2) 12.2 5.0 14.8 6.0 16.1 6.6
Total $241.6 100.0 % $246.1 100.0 % $245.5 100.0 %
(1)Policy years represent the original policy years, and have not been adjusted
to reflect subsequent refinancing activity under HARP.
(2)Adjusted to reflect subsequent refinancing activity under HARP, these
percentages would decrease to 3.3%, 3.7% and 3.9% as of September 30, 2021 ,
December 31, 2020 and September 30, 2020 , respectively.
New Insurance Written
A key component of our current business strategy is to write profitable NIW. We
wrote $26.6 billion and $68.2 billion of primary new mortgage insurance in the
three and nine months ended September 30, 2021 , respectively, compared to $33.3
billion and $75.4 billion of NIW in the three and nine months ended September
30, 2020 , respectively. As shown in the chart above, IIF decreased to $241.6
billion at September 30, 2021 , from $246.1 billion at December 31, 2020 , driven
by a lower Persistency Rate, partially offset by our NIW for the first nine
months of 2021.
Our NIW decreased by 20.3% for the three months ended September 30, 2021
compared to the same period in 2020 due to lower refinance originations
partially offset by increased purchase originations. Our NIW decreased by 9.5%
for the nine months ended September 30, 2021 , compared to the same period in
2020 due to our lower market share and lower utilization of mortgage insurance,
in connection with refinances, partially offset by increases in purchase
mortgage originations. According to industry forecasts, total mortgage
origination volume was lower for the three months ended September 30, 2021 , as
compared to the comparable period in 2020 due to a decline in refinance
activity. Total mortgage origination volume was higher for the nine months ended
September 30, 2021 compared to the comparable period in 2020 due to a strong
purchase market and an increase in refinance originations resulting from the low
interest rate environment.
Although it is difficult to project future volumes, recent market projections
for 2021 estimate total mortgage originations of approximately $4.2 trillion ,
which would represent a decline in the total annual mortgage origination market
of approximately 2% as compared to 2020, with a private mortgage insurance
market of $575 to $600 billion . This outlook anticipates a continued decrease in
refinance originations in the fourth quarter of 2021. While expectations for
refinance volume vary, there is consensus around a large purchase market driven
by increased home sales, which is a positive for mortgage insurers given the
higher likelihood that purchase loans will utilize private mortgage insurance as
compared to refinance loans. If refinance volume declines, we would expect the
Persistency Rate for our portfolio to increase, benefiting the size of our IIF
portfolio. See "Overview-COVID-19 Impacts" above and "Item 1A. Risk Factors" in
our 2020 Form 10-K for more information.
NIW for direct Single Premiums include policies written on an individual basis
(as each loan is originated) and on an aggregated basis (in which each
individual loan in a group of loans is insured in a single transaction,
typically after the loans have been originated). The following table provides
selected information as of and for the periods indicated related to our mortgage
insurance NIW.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
NIW
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2021 2020 2021 2020
NIW $ 26,558 $ 33,320 $ 68,243 $ 75,391
Primary risk written $ 6,781 $ 7,970 $ 16,511 $ 17,712
Average coverage percentage 25.5 % 23.9 % 24.2 % 23.5 %
NIW by loan purpose
Purchases 89.8 % 70.5 % 76.8 % 64.8 %
Refinances 10.2 % 29.5 % 23.2 % 35.2 %
Total borrower-paid NIW 99.2 % 98.5 % 99.2 % 97.9 %
NIW by premium type
Direct Monthly and Other Recurring Premiums 93.8 % 90.0 % 92.5 % 86.2 %
Direct single premiums (1) 6.2 % 10.0 % 7.5 % 13.8 %
NIW by FICO Score (2)
>=740 56.0 % 66.2 % 60.2 % 66.5 %
680-739 34.9 % 30.7 % 33.3 % 30.6 %
620-679 9.1 % 3.1 % 6.5 % 2.9 %
NIW by LTV
95.01% and above 12.1 % 9.7 % 10.5 % 9.2 %
90.01% to 95.00% 46.7 % 39.6 % 40.2 % 38.1 %
85.01% to 90.00% 26.5 % 28.3 % 28.3 % 29.3 %
85.00% and below 14.7 % 22.4 % 21.0 % 23.4 %
(1)Borrower-paid Single Premium Policies were 6.0% and 7.2% of NIW for the three
and nine months ended September 30, 2021 , respectively, compared to 9.0% and
12.3% for the same periods in 2020, respectively. See "Item 1.
Business-Regulation-Federal Regulation-GSE Requirements" in our 2020 Form 10-K
for additional information.
(2)For loans with multiple borrowers, the percentage of NIW by FICO score
represents the lowest of the borrowers' FICO scores.
Insurance and Risk in Force
IIF at September 30, 2021 decreased 1.6% as compared to the same period last
year, reflecting a 25.1% decline in Single Premium Policies in force, partially
offset by a 5.8% increase in Monthly Premium Policies in force. Historically,
there is a close correlation between interest rates and Persistency Rates. Lower
interest rate environments generally increase refinancings, which increase the
cancellation rate of our insurance and negatively affect our Persistency Rates.
As shown in the table below, our Persistency Rate for the 12 months ended
September 30, 2021 declined as compared to the same period in 2020. The decline
in our Persistency Rate and the related decline in our Single Premium Policies
in force at September 30, 2021 , were attributable to increased refinance
activity resulting from historically low interest rates, which led to an
increase in Single Premium Policy cancellations. Single Premium Policy
cancellations was the primary driver of the decrease in unearned premiums on our
condensed consolidated balance sheet at September 30, 2021 as compared to
December 31, 2020 .
Our IIF is the primary driver of the future premiums that we expect to earn over
time. Although not reflected in the current period financial statements, nor in
our reported book value, we expect our IIF to generate substantial premiums in
future periods, due to the high credit quality of our current mortgage insurance
portfolio and its expected persistency over multiple years. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Key Factors Affecting Our Results-Mortgage-IIF and Related Drivers"
in our 2020 Form 10-K for more information.
Our earnings in future periods are subject to elevated risks and uncertainties
due to the potential impact of the unprecedented and continually evolving social
and economic impacts associated with the COVID-19 pandemic on the U.S.
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and global economies generally, and in particular on the U.S. housing, real
estate and housing finance markets. See Note 1 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional information about the COVID-19
pandemic, which could have a material negative effect on the Company's business,
liquidity, results of operations and financial condition. See "Overview-COVID-19
Impacts" and, in our 2020 Form 10-K, "Item 1A. Risk Factors" for additional
information.
Historical loan performance data indicates that credit scores and underwriting
quality are key predictors of credit performance. As of September 30, 2021 ,
substantially all of our total primary RIF is comprised of our portfolio of
business written subsequent to 2008 and has consisted primarily of high credit
quality loans with significantly better credit performance than loans originated
during 2008 and prior periods. Although our actual and expected future losses on
our portfolio written after 2008, together with refinancings under HARP, are
significantly lower than those experienced on our NIW prior to and including
2008, our future losses, including the impact from the COVID-19 pandemic, are
highly uncertain.
Throughout this report, unless otherwise noted, RIF is presented on a gross
basis and includes the amount ceded under reinsurance. RIF and IIF for direct
Single Premiums include policies written on an individual basis (as each loan is
originated) and on an aggregated basis (in which each individual loan in a group
of loans is insured in a single transaction, typically after the loans have been
originated).
The following table provides selected information as of and for the periods
indicated related to mortgage insurance IIF and RIF.
IIF and RIF
($ in millions) September 30, 2021 December 31, 2020 September 30, 2020
Primary IIF $ 241,575 $ 246,144 $ 245,467
Primary RIF $ 59,421 $ 60,656 $ 60,989
Average coverage percentage 24.6 % 24.6 % 24.8 %
Total primary RIF on defaulted loans $ 1,928 $ 3,250 $ 3,747
Persistency Rate (12 months ended) 60.8 % 61.2 % 65.6 %
Persistency Rate (quarterly, annualized)
(1) 67.5 % 60.4 % 60.0 %
Total borrower-paid RIF 89.6 % 86.3 % 84.2 %
Primary RIF by Premium Type
Direct Monthly and Other Recurring Premiums 82.7 % 79.1 % 76.8 %
Direct single premiums (2) 17.3 % 20.9 % 23.2 %
Primary RIF by FICO Score (3)
>=740 57.3 % 57.5 % 57.6 %
680-739 34.8 % 34.6 % 34.3 %
620-679 7.4 % 7.3 % 7.5 %
<=619 0.5 % 0.6 % 0.6 %
Primary RIF by LTV
95.01% and above 14.6 % 14.4 % 14.3 %
90.01% to 95.00% 48.9 % 49.3 % 50.1 %
85.01% to 90.00% 27.8 % 28.0 % 27.9 %
85.00% and below 8.7 % 8.3 % 7.7 %
(1)The Persistency Rate on a quarterly, annualized basis is calculated based on
loan-level detail for the quarter ending as of the date shown. It may be
impacted by seasonality or other factors, including the level of refinance
activity during the applicable periods, and may not be indicative of full-year
trends.
(2)Borrower-paid Single Premium Policies were 8.8%, 9.4% and 9.7% of primary RIF
for the periods indicated, respectively.
(3)For loans with multiple borrowers, the percentage of primary RIF by FICO
score represents the lowest of the borrowers' FICO scores.
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Risk Distribution
We use third-party reinsurance in our mortgage insurance business as part of our
risk distribution strategy, including to manage our capital position and risk
profile. When we enter into a reinsurance agreement, the reinsurer receives a
premium and, in exchange, insures an agreed-upon portion of incurred losses.
While these arrangements have the impact of reducing our earned premiums, they
reduce our required capital and are expected to increase our return on required
capital for the related policies.
The impact of these programs on our financial results will vary depending on the
level of ceded RIF, as well as the levels of prepayments and incurred losses on
the reinsured portfolios, among other factors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Key
Factors Affecting Our Results-Mortgage-Risk Distribution" and Note 8 of Notes to
Consolidated Financial Statements in our 2020 Form 10-K for more information
about our reinsurance transactions.
The table below provides information about the amounts by which Radian
Guaranty's reinsurance programs reduced its Minimum Required Assets as of the
dates indicated.
PMIERs benefit from risk distribution
($ in thousands) September 30, 2021 December 31, 2020 September 30, 2020
PMIERs impact - reduction in Minimum
Required Assets
Excess-of-Loss Program $ 659,151 $ 912,734 $ 783,842
Single Premium QSR Program 328,339 423,712 469,625
QSR Program 14,116 22,712 26,213
Total PMIERs impact $ 1,001,606 $ 1,359,158 $ 1,279,680
Percentage of gross Minimum Required Assets 22.1 % 28.8 % 26.8 %
Results of Operations-Consolidated
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
Radian Group serves as the holding company for our operating subsidiaries and
does not have any operations of its own. Our consolidated operating results for
the three and nine months ended September 30, 2021 and September 30, 2020
primarily reflect the financial results and performance of our two reportable
business segments-Mortgage and homegenius. See "Results of Operations-Mortgage"
and "Results of Operations-homegenius" for the operating results of these
business segments for the three and nine months ended September 30, 2021 ,
compared to the same periods in 2020.
See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for
information regarding modifications to our segment reporting in 2020, including
for the wind down of our traditional appraisal business announced in the fourth
quarter of 2020. All changes in 2020 to the composition of our reportable
segments have been reflected in our segment operating results for all periods
presented.
In addition to the results of our operating segments, pretax income (loss) is
also affected by those factors described in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Key Factors Affecting
Our Results" in our 2020 Form 10-K.
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The following table highlights selected information related to our consolidated
results of operations for the three and nine months ended September 30, 2021 and
2020.
Summary results of operations - Consolidated
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In millions, except per-share
amounts) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Pretax income $ 161.6 $ 161.2 $ 0.4 $ 518.3 $ 300.3 $ 218.0
Net income 126.4 135.1 (8.7) 407.2 245.6 161.6
Diluted net income per share 0.67 0.70 (0.03) 2.11 1.25 0.86
Book value per share at
September 30 23.48 21.52 1.96 23.48 21.52 1.96
Net premiums earned (1) 249.1 286.5 (37.4) 775.7 813.2 (37.5)
Services revenue (2) 37.8 33.9 3.9 90.1 93.9 (3.8)
Net investment income (1) 36.0 36.3 (0.3) 110.5 115.9 (5.4)
Net gains (losses) on investments
and other financial instruments 2.1 17.7 (15.6) 12.6 42.9 (30.3)
Provision for losses (1) 17.3 88.1 70.8 67.1 428.5 361.4
Policy acquisition costs (1) 7.9 10.2 2.3 21.8 23.6 1.8
Cost of services (2) 30.5 24.4 (6.1) 75.4 64.5 (10.9)
Other operating expenses (3) 86.5 69.4 (17.1) 243.2 199.1 (44.1)
Interest expense (1) 21.0 21.1 0.1 63.2 50.0 (13.2)
Income tax provision (benefit) 35.2 26.1 (9.1) 111.1 54.7 (56.4)
Adjusted pretax operating income (4) 160.6 145.0 15.6 512.7 261.1
251.6
Adjusted diluted net operating income per share (4) 0.67 0.59 0.08 2.10 1.05 1.05 Return on equity 11.8 % 13.3 % (1.5) % 12.7 % 8.0 % 4.7 % Adjusted net operating return on equity (4) 11.8 % 11.3 % 0.5 % 12.6 % 6.7 % 5.9 % (1)Relates primarily to the Mortgage segment. See "Results of Operations-Mortgage" for more information. (2)Relates primarily to our homegenius segment. See "Results of Operations-homegenius" for more information. (3)See "Results of Operations-Mortgage," "Results of Operations-homegenius" and "Results of Operations-All Other" for more information on both direct and allocated operating expenses. (4)See "-Use of Non-GAAP Financial Measures" below. Net Income. As discussed in more detail below, our net income for the three months endedSeptember 30, 2021 , decreased as compared to the same period in 2020, primarily reflecting: (i) a decrease in net premiums earned; (ii) an increase in other operating expenses; and (iii) a decrease in net gains on investments and other financial instruments. Partially offsetting these items was a decrease in provision for losses related to our Mortgage segment. Our net income for the nine months endedSeptember 30, 2021 , increased as compared to the same period in 2020, primarily reflecting a decrease in provision for losses related to our Mortgage segment. Partially offsetting this item was: (i) a decrease in net premiums earned; (ii) a decrease in net gains on investments and other financial instruments; (iii) an increase in other operating expenses; and (iv) an increase in interest expense. Diluted Net Income Per Share. The change in diluted net income per share for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, is primarily due to the change in net income, as discussed above. Book Value Per Share. The increase in book value per share from$22.36 atDecember 31, 2020 , to$23.48 atSeptember 30, 2021 , is primarily due to our net income for the nine months endedSeptember 30, 2021 . Partially offsetting this item is: (i) a decrease of$0.58 per share due to unrealized losses in our available for sale securities, recorded in accumulated other comprehensive income and (ii) a$0.41 per share impact of dividends.Net Gains (Losses) on Investments and Other Financial Instruments. The decrease in net gains on investments and other financial instruments for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, is primarily due to: (i) a decrease in net unrealized gains on our trading securities and (ii) a decrease in gains on other financial instruments. The decrease in net gains on investments and other financial instruments for the nine months ended September 49
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30, 2021, as compared to the same period in 2020, is primarily due to: (i) a
decrease in net realized gains on our fixed-maturities available for sale; (ii)
a decrease in gains on other financial instruments; (iii) a decrease in net
unrealized gains on our trading securities; and (iv) a decrease in the fair
value of our embedded derivatives. These decreases were partially offset by a
decrease in impairments recorded in earnings. See Notes 5 and 6 of Notes to
Unaudited Condensed Consolidated Financial Statements for additional information
about the embedded derivatives associated with our reinsurance obtained through
mortgage linked-notes transactions and net gains (losses) on investments,
respectively.
Income Tax Provision. Variations in our effective tax rates, combined with
differences in pretax income, were the drivers of the changes in our income tax
provision between periods. Our effective tax rate for the three and nine months
ended September 30, 2021 was 21.8% and 21.4%, respectively, which approximated
the federal statutory rate of 21%. Those effective tax rates compared to 16.2%
and 18.2% for the same respective periods in 2020. Our effective tax rate for
the three and nine months ended September 30, 2020 was lower than the federal
statutory rate of 21% primarily due to the effects of an update recorded in the
third quarter of 2020 related to our liability for uncertain tax positions.
Return on Equity. The change in return on equity is primarily due to the
increase in net income for the three and nine months ended September 30, 2021 ,
as described above.
Use of Non-GAAP Financial Measures. In addition to the traditional GAAP
financial measures, we have presented "adjusted pretax operating income (loss),"
"adjusted diluted net operating income (loss) per share" and "adjusted net
operating return on equity," which are non-GAAP financial measures for the
consolidated company, among our key performance indicators to evaluate our
fundamental financial performance. These non-GAAP financial measures align with
the way our business performance is evaluated by both management and by our
board of directors. These measures have been established in order to increase
transparency for the purposes of evaluating our operating trends and enabling
more meaningful comparisons with our peers. Although on a consolidated basis
"adjusted pretax operating income (loss)," "adjusted diluted net operating
income (loss) per share" and "adjusted net operating return on equity" are
non-GAAP financial measures, for the reasons discussed above we believe these
measures aid in understanding the underlying performance of our operations.
Total adjusted pretax operating income (loss), adjusted diluted net operating
income (loss) per share and adjusted net operating return on equity are not
measures of overall profitability, and therefore should not be considered in
isolation or viewed as substitutes for GAAP pretax income (loss), diluted net
income (loss) per share or return on equity. Our definitions of adjusted pretax
operating income (loss), adjusted diluted net operating income (loss) per share
and adjusted net operating return on equity, as discussed and reconciled below
to the most comparable respective GAAP measures, may not be comparable to
similarly-named measures reported by other companies.
Our senior management, including our Chief Executive Officer (Radian's chief
operating decision maker), uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of the
Company's business segments and to allocate resources to the segments. See Note
4 of Notes to Consolidated Financial Statements and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-Consolidated-Use of Non-GAAP Financial Measures" each in our 2020
Form 10-K for detailed information regarding items excluded from adjusted pretax
operating income and the reasons for their treatment.
Adjusted pretax operating income (loss) is defined as GAAP consolidated pretax
income (loss) excluding the effects of: (i) net gains (losses) on investments
and other financial instruments; (ii) loss on extinguishment of debt; (iii)
amortization and impairment of goodwill and other acquired intangible assets;
and (iv) impairment of other long-lived assets and other non-operating items,
such as impairment of internal-use software, gains (losses) from the sale of
lines of business and acquisition-related income and expenses.
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The following table provides a reconciliation of consolidated pretax income to
our non-GAAP financial measure for the consolidated company of adjusted pretax
operating income.
Reconciliation of consolidated pretax income to consolidated adjusted pretax operating income
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2021 2020 2021 2020
Consolidated pretax income $ 161,641 $ 161,205 $ 518,326 $ 300,274
Less reconciling income (expense) items
Net gains (losses) on investments and other
financial instruments 2,098 17,652 12,578 42,901
Amortization and impairment of other acquired
intangible assets (862) (961) (2,587) (2,919)
Impairment of other long-lived assets and other
non-operating items (244) (466) (4,349) (788)
Total adjusted pretax operating income (1) $ 160,649 $
144,980
(1)Total adjusted pretax operating income on a consolidated basis consists of
adjusted pretax operating income (loss) for our Mortgage segment, our homegenius
segment and All Other activities, as further detailed in Note 4 of Notes to
Unaudited Condensed Consolidated Financial Statements.
Adjusted diluted net operating income (loss) per share is calculated by dividing
(i) adjusted pretax operating income (loss) attributable to common stockholders,
net of taxes computed using the Company's statutory tax rate, by (ii) the sum of
the weighted average number of common shares outstanding and all dilutive
potential common shares outstanding. The following table provides a
reconciliation of diluted net income (loss) per share to our non-GAAP financial
measure for the consolidated company of adjusted diluted net operating income
(loss) per share.
Reconciliation of diluted net income per share to adjusted diluted net operating income per share
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Diluted net income per share $ 0.67 $ 0.70 $ 2.11 $ 1.25
Less per-share impact of reconciling income
(expense) items
Net gains (losses) on investments and other
financial instruments 0.01 0.09 0.07 0.22
Amortization and impairment of other acquired
intangible assets - - (0.01) (0.01)
Impairment of other long-lived assets and other
non-operating items - - (0.02) -
Income tax (provision) benefit on reconciling
income (expense) items (1) - (0.02) (0.01) (0.04)
Difference between statutory and effective tax
rates (0.01) 0.04 (0.02) 0.03
Per-share impact of reconciling income (expense)
items - 0.11 0.01 0.20
Adjusted diluted net operating income per share
(1) $ 0.67 $ 0.59 $ 2.10 $ 1.05
(1)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Adjusted net operating return on equity is calculated by dividing annualized
adjusted pretax operating income (loss), net of taxes computed using the
Company's statutory tax rate, by average stockholders' equity, based on the
average of the beginning and ending balances for each period presented. The
following table provides a reconciliation of return on equity to our non-GAAP
financial measure for the consolidated company of adjusted net operating return
on equity.
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Reconciliation of return on equity to adjusted net operating return on equity
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Return on equity (1) 11.8 % 13.3 % 12.7 % 8.0 %Less impact of reconciling income (expense) items (2) Net gains (losses) on investments and other financial instruments
0.2 1.7 0.4 1.4
Amortization and impairment of other acquired
intangible assets (0.1) (0.1) (0.1) (0.1)
Impairment of other long-lived assets and other
non-operating items - - (0.1) -Income tax (provision) benefit on reconciling income (expense) items (3)
- (0.3) - (0.3)
Difference between statutory and effective tax rates (0.1) 0.7 (0.1) 0.3
Impact of reconciling income (expense) items - 2.0 0.1 1.3
Adjusted net operating return on equity 11.8 % 11.3 % 12.6 % 6.7 %
(1)Calculated by dividing annualized net income (loss) by average stockholders'
equity, based on the average of the beginning and ending balances for each
period presented.
(2)Annualized, as a percentage of average stockholders' equity.
(3)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Results of Operations-Mortgage
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
The following table summarizes our Mortgage segment's results of operations for
the three and nine months ended September 30, 2021 and 2020.
Summary results of operations - Mortgage
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In millions) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Adjusted pretax operating
income (1) (2) $ 163.1 $ 147.3 $ 15.8 $ 528.9 $ 267.2 $ 261.7
Net premiums written 228.1 259.3 (31.2) 706.0 749.7 (43.7)
(Increase) decrease in
unearned premiums 8.8 24.1 (15.3) 42.6 56.2 (13.6)
Net premiums earned 236.9 283.4 (46.5) 748.6 806.0 (57.4)
Services revenue 5.0 3.9 1.1 13.1 11.0 2.1
Net investment income 32.2 32.1 0.1 99.0 103.0 (4.0)
Provision for losses 16.8 87.8 71.0 66.0 427.0 361.0
Policy acquisition costs 7.9 10.2 2.3 21.8 23.6 1.8
Cost of services 3.9 2.9 (1.0) 10.2 6.8 (3.4)
Other operating expenses (2) 61.9 50.8 (11.1) 172.7 147.5 (25.2)
Interest expense 21.0 21.1 0.1 63.2 50.0 (13.2)
(1)Our senior management uses adjusted pretax operating income as our primary measure to evaluate the fundamental financial performance of each of the Company's business segments. See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements.
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(2)The following tables show additional information about Mortgage other
operating expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Direct other operating expenses $ 27.6 $ 21.7 $ 77.5 $ 63.8
Allocated corporate operating expenses (a) 34.3 29.1 95.2 83.7
Total other operating expenses $ 61.9 $ 50.8 $ 172.7 $ 147.5
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Salaries and other general other operating
expenses $ 50.4 $ 52.6 $ 151.3 $ 152.3
Variable and share-based incentive compensation 17.1 10.5 41.2 25.9
Ceding commissions (5.6) (12.3) (19.8) (30.7)
Total other operating expenses $ 61.9 (a)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for more information about our allocation of corporate operating expenses to segments. Adjusted Pretax Operating Income. Our Mortgage segment's adjusted pretax operating income increased for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, primarily due to a decrease in provision for losses. Partially offsetting this item is: (i) a decrease in net premiums earned and (ii) an increase in other operating expenses. Our Mortgage segment's adjusted pretax operating income for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was also impacted by an increase in interest expense. See "-Net Premiums Written and Earned" and "-Provision for Losses" below for more information about our net premiums earned and provision for losses, respectively. Net Premiums Written and Earned. Net premiums written for the three and nine months endedSeptember 30, 2021 decreased, compared to the same periods in 2020. The decrease for the three months endedSeptember 30, 2021 , was primarily driven by lower direct premium rates on our IIF portfolio compared to the same period in 2020, as well as a lower proportion of Single Premium Policies. For the nine months endedSeptember 30, 2020 , higher recorded ceded losses resulted in elevated ceded premiums due to a reduction in accrued profit commissions, which lowered net premiums written in that period. The subsequent improvement in accrued profit commissions in 2021 was more than offset for the nine months endedSeptember 30, 2021 , by lower direct premium rates on our IIF portfolio compared to the same periods in 2020, as well as a lower proportion of Single Premium Policies. 53
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The table below provides additional information about the components of mortgage
insurance net premiums earned for the periods indicated, including the effects
of our reinsurance programs.
Net premiums earned
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except as otherwise indicated) 2021 2020 2021 2020
Direct
Premiums earned, excluding revenue from cancellations$ 239,786 $ 259,889 $ 739,768 $ 798,004 Single Premium Policy cancellations 25,592 65,667 95,694 139,823 Direct premiums 265,378 325,556 835,462 937,827 Assumed (1) 1,683 2,946 5,596 9,599 Ceded Premiums earned, excluding revenue from cancellations (27,662) (25,120) (80,359) (80,222) Single Premium Policy cancellations (2) (7,338) (18,679) (27,483) (40,286) Profit commission-other (3) 4,806 (1,347) 15,401 (20,967) Ceded premiums (30,194) (45,146) (92,441) (141,475) Total net premiums earned$ 236,867
Direct premium yield (in basis points) (4) 40.3 43.2 40.7 44.3 Net premium yield (in basis points) (5) 39.6 46.6 40.9 44.2 Average primary IIF (in billions)$ 239.4
(1)Primarily includes premiums earned from our participation in certain credit risk transfer programs. (2)Includes the impact of related profit commissions. (3)Represents the profit commission on the Single Premium QSR Program, excluding the impact of Single Premium Policy cancellations. (4)Calculated by dividing annualized direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF. (5)Calculated by dividing annualized net premiums earned by average primary IIF. Net premiums earned decreased for the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020, primarily due to: (i) a decrease in premiums earned on our in-force Single Premium Policies and Monthly Premium Policies and (ii) a decrease in the impact, net of reinsurance, from Single Premium Policy cancellations, due to decreased refinance activity as compared to the same period in 2020. These decreases were partially offset by a decrease in ceded premiums, which were elevated in 2020 due to reduced profit commissions as a result of higher ceded losses in 2020. The level of mortgage prepayments affects the revenue ultimately produced by our mortgage insurance business and is influenced by the mix of business we write. We believe that writing a mix of Single Premium Policies and Monthly Premium Policies has the potential to moderate the overall impact on our results if actual prepayments are significantly different from expectations. However, the impact of this moderating effect is affected by the amount of reinsurance we obtain on portions of our portfolio, with the Single Premium QSR Program currently reducing the proportion of retained Single Premium Policies in our portfolio. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting Our Results-Mortgage-IIF and Related Drivers" in our 2020 Form 10-K for more information. 54
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The following table provides information related to the premium impact of our
reinsurance transactions. See Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements for more information about our reinsurance
programs.
Ceded premiums earned
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
Single Premium QSR Program $ 12,752 $ 34,578 $ 44,694 $ 109,444
Excess-of-Loss Program 16,581 8,290 44,336 25,016
QSR Program 754 2,164 3,091 6,662
Other 107 114 320 353
Total ceded premiums earned (1) $ 30,194 $ 45,146 $ 92,441 $ 141,475
Percentage of total direct and assumed premiums
earned 10.8 % 13.7 % 10.7 % 14.9 %
(1)Does not include the benefit from ceding commissions on our Single Premium
QSR Programs, which are included in other operating expenses on the consolidated
statement of operations. See Note 8 of Notes to Unaudited Condensed Consolidated
Financial Statements for additional information.
Net Investment Income. Lower investment yields, partially offset by higher
average investment balances, resulted in a decrease in net investment income for
the nine months ended September 30, 2021 , compared to the same period in 2020.
Our higher average investment balances were a result of investing our positive
cash flows from operations.
Provision for Losses. The following table details the financial impact of the
significant components of our provision for losses for the periods indicated.
Provision for losses
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions, except reserve per new
default) 2021 2020 2021 2020
Current period defaults (1) $ 33.3 $ 96.0 $ 119.8 $ 448.5
Prior period defaults (2) (16.5) (8.2) (53.9) (21.4)
Second-lien mortgage loan premium deficiency
reserve and other - - 0.1 (0.1)
Provision for losses $ 16.8 $ 87.8 $ 66.0 $ 427.0
Loss ratio (3) 7.1 % 31.0 % 8.8 % 53.0 %
Reserve per new default (4) $ 4,095 $ 4,681 $ 4,260 $ 4,798
(1)Related to defaulted loans with a most recent default notice dated in the
period indicated. For example, if a loan had defaulted in a prior period, but
then subsequently cured and later re-defaulted in the current period, the
default would be considered a current period default.
(2)Related to defaulted loans with a default notice dated in a period earlier
than the period indicated, which have been continuously in default since that
time.
(3)Provision for losses as a percentage of net premiums earned. See below and
"-Net Premiums Written and Earned" for further discussion of the components of
this ratio.
(4)Calculated by dividing provision for losses for new defaults, net of
reinsurance, by new primary defaults for each period.
Our mortgage insurance provision for losses for the three and nine months ended
September 30, 2021 decreased by $71.0 million and $361.0 million , respectively,
as compared to the same periods in 2020. Reserves established for new default
notices were the primary driver of our total incurred losses for the three and
nine months ended September 30, 2021 and 2020. Current period new primary
defaults decreased significantly for the three and nine months ended September
30, 2021 , compared to the same periods in 2020, as shown below. The decreases
primarily relate to a decrease in the number of new default notices related to
the effects of the COVID-19 pandemic, as compared to the same periods last year.
Our gross Default to Claim Rate assumption for new primary defaults was 8.0% at
September 30, 2021 , compared to 8.5% at September 30, 2020 .
Our provision for losses during the three and nine months ended September 30,
2021 benefited from favorable reserve development on prior period defaults,
primarily as a result of more favorable trends in Cures than originally
estimated. These trends resulted in, among other changes during the nine months
ended September 30, 2021 , a reduction from 8.5% to 8.0% in our Default to Claim
Rate assumption for default notices reported between April and December 2020
that was recorded as a change to our provision for losses during the second
quarter of 2021. See Notes 1 and 11 of Notes to Unaudited Condensed Consolidated
Financial Statements and, in our 2020 Form 10-K, "Item 1A. Risk Factors" for
additional information.
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Our primary default rate as a percentage of total insured loans at September 30,
2021 was 3.4% compared to 5.2% at December 31, 2020 . The following table shows a
rollforward of our primary loans in default.
Rollforward of primary loans in default
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Beginning default inventory 40,464 69,742 55,537 21,266
New defaults 8,132 20,508 28,128 93,473
Cures (14,475) (27,283) (49,293) (50,837)
Claims paid (321) (240) (562) (1,154)
Rescissions and Claim Denials, net of
Reinstatements (1) (5) 10 (15) (11)
Ending default inventory 33,795 62,737 33,795 62,737
(1)Net of any previous Rescissions and Claim Denials that were reversed and
reinstated during the period. Such reinstated Rescissions and Claim Denials may
ultimately result in a paid claim.
The following tables show additional information about our primary loans in
default as of the dates indicated.
Primary loans in default - additional information
September 30, 2021
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 3rd Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 6,671 19.7 % 34 38.4 % $ 59,663 7.0 %
Four to eleven payments 9,977 29.5 102 28.5 177,416 20.9
Twelve payments or more 16,849 49.9 794 25.1 598,549 70.3
Pending claims 298 0.9 N/A 14.2 15,523 1.8
Total 33,795 100.0 % 930 851,151 100.0 %
IBNR and other 3,788
LAE 21,400
Total primary reserve $ 876,339
December 31, 2020
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 12,504 22.5 % 64 36.5 % $ 99,491 12.4 %
Four to eleven payments 37,691 67.9 190 26.3 512,248 64.1
Twelve payments or more 5,067 9.1 861 5.4 172,161 21.5
Pending claims 275 0.5 N/A 8.2 15,614 2.0
Total 55,537 100.0 % 1,115 799,514 100.0 %
IBNR and other 9,966
LAE 20,172
Total primary reserve $ 829,652
N/A - Not applicable
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We develop our Default to Claim Rate estimates based primarily on models that
use a variety of loan characteristics to determine the likelihood that a default
will reach claim status. See Note 11 of Notes to Consolidated Financial
Statements in our 2020 Form 10-K for additional details about our Default to
Claim Rate assumptions.
Our aggregate weighted average net Default to Claim Rate assumption for our
primary loans used in estimating our reserve for losses, which is net of
estimated Claim Denials and Rescissions, was approximately 42% and 24% at
September 30, 2021 and December 31, 2020 , respectively. This increase was
primarily due to a shift in the mix of defaults as of September 30, 2021 , given
the smaller proportion of loans with fewer missed payments.
Our net Default to Claim Rate and loss reserve estimate incorporates our
expectations with respect to future Rescissions, Claim Denials and Claim
Curtailments. Our estimate of such net future Loss Mitigation Activities,
inclusive of claim withdrawals, reduced our loss reserve as of September 30,
2021 and December 31, 2020 by $29.5 million and $29.1 million , respectively.
These expectations are based primarily on recent claim withdrawal activity and
our recent experience with respect to the number of claims that have been denied
due to the policyholder's failure to submit sufficient documentation to perfect
a claim within the time period permitted under our Master Policies and also our
recent experience with respect to the number of insurance certificates that have
been rescinded due to fraud, underwriter negligence or other factors.
During the third quarter of 2021, Hurricane Ida caused extensive property damage
to areas of Louisiana , New York , New Jersey and Pennsylvania , as well as other
general disruptions including power outages and flooding. See Note 11 of Notes
to Unaudited Condensed Consolidated Financial Statements for additional
information.
Our mortgage insurance total loss reserve as a percentage of our mortgage
insurance total RIF was 1.5% and 1.4% at September 30, 2021 and December 31,
2020 , respectively. See Note 11 of Notes to Unaudited Condensed Consolidated
Financial Statements for information regarding our reserves for losses and a
reconciliation of our Mortgage segment's beginning and ending reserves for
losses and LAE.
We considered the sensitivity of our loss reserve estimates at September 30,
2021 by assessing the potential changes resulting from a parallel shift in Claim
Severity and Default to Claim Rate for primary loans. For example, assuming all
other factors remain constant, for every one percentage point absolute change in
primary Claim Severity for our primary insurance risk exposure (which we
estimated to be 98% of our risk exposure at September 30, 2021 and December 31,
2020 ), we estimated that our total loss reserve at September 30, 2021 would
change by approximately $8.7 million . Assuming the portfolio mix and all other
factors remain constant, for every one percentage point absolute change in our
primary net Default to Claim Rate, we estimated a $20.1 million change in our
primary loss reserve at September 30, 2021 .
Total mortgage insurance claims paid of $10.2 million and $24.9 million for the
three and nine months ended September 30, 2021 , respectively, decreased from
claims paid of $10.8 million and $57.0 million for the same respective periods
in 2020. The decrease in claims paid is primarily attributable to
COVID-19-related forbearance plans and suspensions of foreclosure and evictions.
Claims paid in both periods also include the impact of commutations and
settlements. Although expected claims are included in our reserve for losses,
the timing of claims paid is subject to fluctuation from quarter to quarter,
based on the rate that defaults cure and other factors (as described in "Item 1.
Business-Mortgage Insurance-Defaults and Claims" in our 2020 Form 10-K) that
make the timing of paid claims difficult to predict.
The following table shows net claims paid and average primary claim paid for the
periods indicated.
Claims paid
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2021 2020 2021 2020
Net claims paid (1)
Total primary claims paid $ 5,330 $ 11,331 $ 16,811 $ 57,833
Total pool and other 991 (230) 204 (502)
Subtotal 6,321 11,101 17,015 57,331
Impact of commutations and settlements (2) 3,915 (267) 7,915 (323)
Total net claims paid $ 10,236 $ 10,834
Total average net primary claim paid (1) (3)
$ 44.1 $ 48.6 Average direct primary claim paid (3) (4)$ 43.2 $ 47.8
(1)Includes the impact of reinsurance recoveries and LAE. (2)Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For the nine months endedSeptember 30, 2021 , also includes payments made to settle certain previously disclosed legal proceedings. (3)Calculated without giving effect to the impact of other commutations and settlements. (4)Before reinsurance recoveries. 57
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Other Operating Expenses. Other operating expenses for the three and nine months
ended September 30, 2021 increased as compared to the same periods in 2020,
primarily due to: (i) an increase in variable and share-based incentive
compensation expense in 2021, including as part of allocated corporate operating
expenses and (ii) a decrease in ceding commissions.
Our expense ratio on a net premiums earned basis represents our Mortgage
segment's operating expenses (which include policy acquisition costs and other
operating expenses, as well as allocated corporate operating expenses),
expressed as a percentage of net premiums earned. Our expense ratio was 29.5%
and 26.0% for the three and nine months ended September 30, 2021 , respectively,
compared to 21.5% and 21.2% for the same periods in 2020, respectively. The
decrease in net premiums earned was the primary driver of the increase in the
expense ratio for the three months ended September 30, 2021 . The increase in
other operating expenses was the primary driver of the increase in the expense
ratio for the nine months ended September 30, 2021 .
Interest Expense. The increase in interest expense for the nine months ended
September 30, 2021 , as compared to the same period in 2020, primarily reflects
an increase in our senior notes outstanding in 2021 compared to 2020. See Note
12 of Notes to Unaudited Condensed Consolidated Financial Statements for
additional information on our senior notes.
Results of Operations-homegenius
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
As noted above in Results of Operations-Consolidated and as further discussed in
Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements, we
made certain modifications to our segment reporting in 2020. These changes to
our reportable segments have been reflected in our homegenius segment operating
results for all periods presented. The following table summarizes our homegenius
segment's results of operations for the three and nine months ended September
30, 2021 and 2020.
Summary results of operations - homegenius
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In millions) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Adjusted pretax operating
income (loss) (1) (2) $ (5.6) $ (5.0) $ (0.6) $ (25.2) $ (12.1) $ (13.1)
Net premiums earned 12.3 7.1 5.2 27.1 15.0 12.1
Services revenue 32.8 22.6 10.2 77.1 63.6 13.5
Cost of services 26.6 18.1 (8.5) 65.1 45.8 (19.3)
Other operating expenses (2) 23.5 16.4 (7.1) 63.3 43.7 (19.6)
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of the
Company's business segments. See Note 4 of Notes to Unaudited Condensed
Consolidated Financial Statements.
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(2)The following tables show additional information about homegenius other
operating expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Direct other operating expenses $ 18.6 $ 13.1 $ 49.6 $ 34.3
Allocated corporate operating expenses (a) 4.9 3.3 13.7 9.4
Total other operating expenses $ 23.5 $ 16.4 $ 63.3 $ 43.7
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Salaries and other general other operating
expenses $ 15.0 $ 11.6 $ 42.9 $ 33.9
Variable and share-based incentive compensation 6.2 3.1 15.0 6.4
Title agent commissions 2.3 1.7 5.4 3.4
Total other operating expenses $ 23.5 $ 16.4 $ 63.3 $ 43.7
(a)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements
for more information about our allocation of corporate operating expenses to
segments.
Adjusted Pretax Operating Income (Loss). Our homegenius segment's adjusted
pretax operating loss for the three and nine months ended September 30, 2021 was
$5.6 million and $25.2 million , respectively, compared to adjusted pretax
operating loss of $5.0 million and $12.1 million for the same periods in 2020,
respectively. The increase in our adjusted pretax operating loss for the three
and nine months ended September 30, 2021 , as compared to the same period in
2020, was primarily driven by: (i) an increase in variable and share-based
incentive compensation expense in 2021, including as part of allocated corporate
operating expenses; (ii) an increase in title agent commissions; and (iii)
continued strategic investments focused on our title and digital real estate
businesses. Such investments contributed to an increase in total expenses, which
was partially offset by increases in net premiums earned and services revenue.
The increases in net premiums earned and services revenue were primarily due to
increases in new policies written and closed orders in our title services
business, respectively. This business has accounted for a majority of the total
revenue from our homegenius segment in 2021. See Note 4 of Notes to Unaudited
Condensed Consolidated Financial Statements for the disaggregation of services
revenues from external customers, by type.
Results of Operations-All Other
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
All Other activities include: (i) income (losses) from assets held by our
holding company; (ii) related general corporate operating expenses not
attributable or allocated to our reportable segments; (iii) for all periods
prior to its sale in the first quarter of 2020, income and expenses related to
Clayton ; (iv) for all periods presented, the income and expenses related to our
traditional appraisal services; and (v) certain other immaterial revenue and
expense items. See Note 4 of Notes to Unaudited Condensed Consolidated Financial
Statements for additional information.
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The following table summarizes our All Other results of operations for the three
and nine months ended
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In millions) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Adjusted pretax operating
income (loss) (1) $ 3.1 $ 2.7 $ 0.4 $ 9.0 $ 6.0 $ 3.0
Services revenue - 8.3 (8.3) 0.1 20.5 (20.4)
Net investment income 3.8 4.1 (0.3) 11.4 12.6 (1.2)
Cost of services - 4.1 4.1 0.1 12.8 12.7
Other operating expenses 0.9 1.8 0.9 3.0 7.1 4.1
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of the
Company's business segments. See Note 4 of Notes to Unaudited Condensed
Consolidated Financial Statements.
Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating,
investing and financing activities.
Summary cash flows - Consolidated
Nine Months Ended
September 30,
(In thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 403,304 $ 498,756
Investing activities (33,984) (737,657)
Financing activities (306,891) 229,071
Increase (decrease) in cash and restricted cash
Operating Activities. Our most significant source of operating cash flows is from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are for our operating expenses and claims paid on our mortgage insurance policies. Net cash provided by operating activities totaled$403.3 million for the nine months endedSeptember 30, 2021 , compared to$498.8 million for the same period in 2020. This decrease was principally due to lower direct premiums written, partially offset by a reduction in claims paid for the nine months endedSeptember 30, 2021 . Investing Activities. Net cash used in investing activities was$34.0 million for the nine months endedSeptember 30, 2021 , compared to$737.7 million used in investing activities for the same period in 2020. This change was primarily the result of a decrease in purchases, net of fixed-maturity investments available for sale. Financing Activities. Net cash used in financing activities was$306.9 million for the nine months endedSeptember 30, 2021 , compared to net cash provided by financing activities of$229.1 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , our primary financing activities included: (i) repurchases of our common shares; (ii) payment of dividends; and (iii) net changes in secured borrowings. For the nine months endedSeptember 30, 2020 , cash provided by financing activities included the issuance of Senior Notes due 2025, partially offset by: (i) repurchases of our common shares and (ii) payments of dividends. See Notes 12 and 14 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our borrowings and share repurchases, respectively. See "Item 1. Financial Statements (Unaudited)-Condensed Consolidated Statements of Cash Flows (Unaudited)" for additional information. 60
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Liquidity Analysis-Holding Company
Radian Group serves as the holding company for our operating subsidiaries and
does not have any operations of its own. At September 30, 2021 , Radian Group had
available, either directly or through unregulated subsidiaries, unrestricted
cash and liquid investments of $768.4 million . Available liquidity at
September 30, 2021 excludes certain additional cash and liquid investments that
have been advanced to Radian Group from its subsidiaries to pay for corporate
expenses and interest payments. Total liquidity, which includes our undrawn
$267.5 million unsecured revolving credit facility, as described below, was $1.0
billion as of September 30, 2021 .
During the nine months ended September 30, 2021 , Radian Group's available
liquidity decreased by $334.3 million , primarily due to payments for share
repurchases and dividends, as described below.
In addition to available cash and marketable securities, Radian Group's
principal sources of cash to fund future liquidity needs include: (i) payments
made to Radian Group by its subsidiaries under expense- and tax-sharing
arrangements; (ii) net investment income earned on its cash and marketable
securities; (iii) to the extent available, dividends or other distributions from
its subsidiaries; and (iv) amounts, if any, that Radian Guaranty is able to
repay under the 2017 Surplus Note.
Radian Group also has in place a $267.5 million unsecured revolving credit
facility with a syndicate of bank lenders, which has a maturity date of
January 18, 2022 . Subject to certain limitations, borrowings under the credit
facility may be used for working capital and general corporate purposes,
including, without limitation, capital contributions to our insurance and
reinsurance subsidiaries as well as growth initiatives. At September 30, 2021 ,
the full $267.5 million remains undrawn and available under the facility. The
credit facility has a minimum liquidity requirement of $35 million . We expect to
renew our credit facility prior to the January 2022 maturity date. See Note 12
of Notes to Consolidated Financial Statements in our 2020 Form 10-K for
additional information on the unsecured revolving credit facility.
We expect Radian Group's principal liquidity demands for the next 12 months to
be: (i) the payment of corporate expenses, including taxes; (ii) interest
payments on our outstanding debt obligations; (iii) subject to approval by our
board of directors and our ongoing assessment of our financial condition, the
payment of quarterly dividends on our common stock, which we increased in May
2021 from $0.125 to $0.14 per share; and (iv) the potential continued
repurchases of shares of our common stock pursuant to our current and potential
future share repurchase authorizations, as described below.
In addition to our ongoing short-term liquidity needs discussed above, our most
significant need for liquidity beyond the next 12 months is the repayment of
$1.4 billion aggregate principal amount of our senior debt due in future years.
See "-Capitalization-Holding Company " below for details of our debt maturity
profile. Radian Group's liquidity demands for the next 12 months or in future
periods could also include: (i) early repurchases or redemptions of portions of
our debt obligations; (ii) potential additional investments to support our
business strategy; and (iii) potential additional capital contributions to its
subsidiaries, including due to the continuing impact that the COVID-19 pandemic
could have on the liquidity, results of operations and financial condition of
Radian Group and its subsidiaries. In our 2020 Form 10-K, see "Item 1A. Risk
Factors," including "-Radian Group's sources of liquidity may be insufficient to
fund its obligations" and "-Radian Guaranty may fail to maintain its eligibility
status with the GSEs, and the additional capital required to support Radian
Guaranty's eligibility could reduce our available liquidity" for additional
discussion about the elevated risks and uncertainties associated with the
COVID-19 pandemic and the potential impact to Radian Guaranty's Minimum Required
Assets. See also Notes 1 and 16 of Notes to Unaudited Condensed Consolidated
Financial Statements and "Overview-COVID-19 Impacts" for further information.
If Radian Group's current sources of liquidity are insufficient to fund its
obligations, or if we otherwise decide to increase our liquidity position,
Radian Group may seek additional capital, including by incurring additional
debt, issuing additional equity, or selling assets, which we may not be able to
do on favorable terms, if at all.
Share Repurchases. During the nine months ended September 30, 2021 , the Company
repurchased 11.4 million shares of Radian Group common stock under programs
authorized by Radian Group's board of directors, at a total cost of $257.0
million , including commissions. See Note 14 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional details on our share repurchase
program.
Dividends and Dividend Equivalents. Throughout 2020, and for the first quarter
of 2021, our quarterly common stock dividend was $0.125 per share. Effective May
4, 2021 , Radian Group's board of directors authorized an increase in the
Company's quarterly dividend to $0.14 per share. Based on our current
outstanding shares of common stock and restricted stock units, we expect to
require approximately $102 million in the aggregate to pay dividends and
dividend equivalents for the next 12 months. Radian Group is not subject to any
limitations on its ability to pay dividends except those generally applicable to
corporations that are incorporated in Delaware . The declaration and payment of
future quarterly dividends remains subject to the board of directors'
determination.
Corporate Expenses and Interest Expense. Radian Group has expense-sharing
arrangements in place with its principal operating subsidiaries that require
those subsidiaries to pay their allocated share of certain holding-company-level
expenses, including interest payments on Radian Group's outstanding debt
obligations. Corporate expenses and interest expense on Radian Group's debt
obligations allocated under these arrangements during the nine months ended
September 30, 2021 of $108.9 million and $62.0 million , respectively, were
substantially all reimbursed by its subsidiaries. We expect
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substantially all of our holding company expenses to continue to be reimbursed
by our subsidiaries under our expense-sharing arrangements. The expense-sharing
arrangements between Radian Group and its mortgage insurance subsidiaries, as
amended, have been approved by the Pennsylvania Insurance Department , but such
approval may be modified or revoked at any time.
Taxes. Pursuant to our tax-sharing agreements, our operating subsidiaries pay
Radian Group an amount equal to any federal income tax the subsidiary would have
paid on a standalone basis if they were not part of our consolidated tax return.
As a result, from time to time, under the provisions of our tax-sharing
agreements, Radian Group may pay to or receive from its operating subsidiaries
amounts that differ from Radian Group's consolidated federal tax payment
obligation. During the nine months ended September 30, 2021 , Radian Group
received $18.8 million of tax-sharing agreement payments from its operating
subsidiaries.
Capitalization-Holding Company
The following table presents our holding company capital structure.
Capital structure
September 30, December 31,
(In thousands) 2021 2020
Debt
Senior Notes due 2024 $ 450,000 $ 450,000
Senior Notes due 2025 525,000 525,000
Senior Notes due 2027 450,000 450,000
Deferred debt costs on senior notes (16,498) (19,326)
Revolving credit facility - -
Total 1,408,502 1,405,674
Stockholders' equity 4,257,936 4,284,353
Total capitalization $ 5,666,438 $ 5,690,027
Debt-to-capital ratio 24.9 % 24.7 %
Stockholders' equity decreased by $26.4 million from December 31, 2020 to
September 30, 2021 . The net decrease in stockholders' equity for the nine months
ended September 30, 2021 resulted primarily from share repurchases of $257.0
million , net unrealized losses on investments of $111.5 million primarily as a
result of an increase in market interest rates during the year, and dividends of
$78.9 million , partially offset by our net income of $407.2 million .
We regularly evaluate opportunities, based on market conditions, to finance our
operations by accessing the capital markets or entering into other types of
financing arrangements with institutional and other lenders and financing
sources, and consider various measures to improve our capital and liquidity
positions, as well as to strengthen our balance sheet, improve Radian Group's
debt maturity profile and maintain adequate liquidity for our operations. In the
past we have repurchased and exchanged, prior to maturity, some of our
outstanding debt, and in the future, we may from time to time seek to redeem,
repurchase or exchange for other securities, or otherwise restructure or
refinance some or all of our outstanding debt prior to maturity in the open
market through other public or private transactions, including pursuant to one
or more tender offers or through any combination of the foregoing, as
circumstances may allow. The timing or amount of any potential transactions will
depend on a number of factors, including market opportunities and our views
regarding our capital and liquidity positions and potential future needs,
including as a result of the effects of the COVID-19 pandemic. There can be no
assurance that any such transactions will be completed on favorable terms, or at
all.
Mortgage
The principal demands for liquidity in our Mortgage business currently include:
(i) the payment of claims and potential claim settlement transactions, net of
reinsurance; (ii) expenses (including those allocated from Radian Group ); (iii)
repayments of FHLB advances; (iv) repayments, if any, associated with the 2017
Surplus Note; and (v) taxes, including potential additional purchases of U.S.
Mortgage Guaranty Tax and Loss Bonds. See Notes 10 and 16 of Notes to
Consolidated Financial Statements in our 2020 Form 10-K for additional
information related to these non-interest bearing instruments.
The principal sources of liquidity in our mortgage insurance business currently
include insurance premiums, net investment income and cash flows from: (i)
investment sales and maturities; (ii) FHLB advances; and (iii) capital
contributions from Radian Group . We believe that the operating cash flows
generated by each of our mortgage insurance subsidiaries will provide these
subsidiaries with a substantial portion of the funds necessary to satisfy their
needs for the foreseeable future. However, see "Overview-COVID-19 Impacts" and
Note 1 of Notes to Unaudited Condensed Consolidated Financial
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of Operations
Statements for discussion about the elevated risks and uncertainties associated
with the COVID-19 pandemic, including the impact on our PMIERs Cushion.
As of September 30, 2021 , our mortgage insurance subsidiaries maintained claims
paying resources of $5.8 billion on a statutory basis, which consists of
contingency reserves, statutory policyholders' surplus, premiums received but
not yet earned and loss reserves. In addition, our reinsurance programs are
designed to provide additional claims-paying resources during times of economic
stress and elevated losses. See Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional information.
Radian Guaranty's Risk-to-capital as of September 30, 2021 was 11.4 to 1. Radian
Guaranty is not expected to need additional capital to satisfy state insurance
regulatory requirements in their current form. At September 30, 2021 , Radian
Guaranty had statutory policyholders' surplus of $646.9 million . This balance
includes a $313.1 million benefit from U.S. Mortgage Guaranty Tax and Loss Bonds
issued by the U.S. Department of the Treasury , which mortgage guaranty insurers
such as Radian Guaranty may purchase in order to be eligible for a tax
deduction, subject to certain limitations, related to amounts required to be set
aside in statutory contingency reserves. See Note 16 of Notes to Consolidated
Financial Statements, "Overview-COVID-19 Impacts" and "Item 1A. Risk Factors" in
our 2020 Form 10-K for more information about these bonds and the risks
associated with potential corporate tax rate increases, our statutory and PMIERs
requirements and the potential effects of increased defaults due to the COVID-19
pandemic.
Radian Guaranty currently is an approved mortgage insurer under the PMIERs.
Private mortgage insurers, including Radian Guaranty, are required to comply
with the PMIERs to remain approved insurers of loans purchased by the GSEs. At
September 30, 2021 , Radian Guaranty's Available Assets under the PMIERs
financial requirements totaled approximately $5.3 billion , resulting in a PMIERs
Cushion of $1.7 billion , or 49%, over its Minimum Required Assets. Those amounts
compare to Available Assets and a PMIERs cushion of $4.7 billion and $1.3
billion , respectively, at December 31, 2020 .
The primary driver of the increase in Radian Guaranty's PMIERs Cushion during
the nine months ended September 30, 2021 is the increase in Available Assets,
reflecting positive cash flows from operating activities, combined with a
decrease in Minimum Required Assets. During the nine months ended September 30,
2021 , Radian Guaranty's Minimum Required Assets decreased primarily as a result
of a decrease in the number of primary loans in default and an overall decline
in IIF. Radian Guaranty's Minimum Required Assets include a benefit as a result
of reinsurance agreements, including the addition of the Eagle Re 2021-1 Ltd.
reinsurance agreement in April 2021 . See Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional information on our reinsurance
agreements.
Our PMIERs Cushion at September 30, 2021 , also includes a benefit from the
application of the Disaster Related Capital Charge that has reduced the total
amount of Minimum Required Assets that Radian Guaranty otherwise would have been
required to hold against pandemic-related defaults by approximately $336 million
as of September 30, 2021 , taking into consideration our risk distribution
structures in effect as of that date. We expect that application of the Disaster
Related Capital Charge will continue to materially reduce Radian Guaranty's
PMIERs Minimum Required Assets, but will diminish over time.
Notwithstanding the continued application of the Disaster Related Capital
Charge, the total amount of Minimum Required Assets we may be required to hold
against defaulted loans will increase over time, because the 0.30 multiplier is
applied to a higher base factor for the defaulting loans (including those in
forbearance) as they age, with increases taking place upon four, six and 12
missed monthly payments. Additionally, given the lack of an expiration date
under the CARES Act, it is difficult to estimate how long the GSEs may continue
to offer COVID-19 forbearance programs for new defaults. It is also difficult to
assess how long the GSEs may continue to apply the COVID-19 Amendment to loans
in a COVID-19 related forbearance program. As described above, the COVID-19
Crisis Period expired March 31, 2021 . See "Item 1. Business-Regulation-Federal
Regulation-GSE Requirements" in our 2020 Form 10-K for more information about
the Disaster Related Capital Charge, and for further information, including on
the expiration of the COVID-19 Crisis Period, see "Overview-Legislative and
Regulatory Developments-COVID-19 Amendment to PMIERs."
The impact of increased defaults resulting from Hurricane Ida is expected to
increase our Minimum Required Assets under the PMIERs financial requirements by
an immaterial amount. See "-Results of Operations-Mortgage" for additional
information.
Even though they hold assets in excess of the minimum statutory capital
thresholds and PMIERs financial requirements, the ability of Radian's mortgage
insurance subsidiaries to pay dividends on their common stock is restricted by
certain provisions of the insurance laws of Pennsylvania , their state of
domicile. In light of Radian Guaranty's negative unassigned surplus related to
operating losses in prior periods, the ongoing need to set aside contingency
reserves, and the current ongoing economic uncertainty related to the COVID-19
pandemic, which increased losses in 2020 and could cause losses in future
periods, we do not anticipate that Radian Guaranty will be permitted under
applicable insurance laws to pay dividends or other distributions for the
foreseeable future without prior approval from the Pennsylvania Insurance
Department . Under Pennsylvania's insurance laws, an insurer must obtain the
Pennsylvania Insurance Department's approval to pay an Extraordinary
Distribution. Radian Guaranty sought and received such approval to return
capital by paying Extraordinary Distributions to Radian Group in 2019 and 2018.
See Note 16 of Notes to Consolidated Financial Statements in our 2020 Form 10-K
for additional information on our Extraordinary Distributions, statutory
dividend restrictions and contingency reserve requirements.
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Glossary
Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Radian Guaranty and Radian Reinsurance are both members of the FHLB. As members,
they may borrow from the FHLB, subject to certain conditions, which include
requirements to post collateral and to maintain a minimum investment in FHLB
stock. Advances from the FHLB may be used to provide low-cost, supplemental
liquidity for various purposes, including to fund incremental investments.
Radian's current strategy includes using FHLB advances as financing for general
cash management purposes and for purchases of additional investment securities
that have similar durations, for the purpose of generating additional earnings
from our investment securities portfolio with limited incremental risk. As of
September 30, 2021 , there were $172.6 million of FHLB advances outstanding. See
Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements for
additional information.
homegenius
As of September 30, 2021 , our homegenius segment maintained cash and liquid
investments totaling $84.5 million , primarily held by Radian Title Insurance .
Title insurance companies, including Radian Title Insurance , are subject to
comprehensive state regulations, including minimum net worth requirements.
Radian Title Insurance was in compliance with all of its minimum net worth
requirements at September 30, 2021 . In the event the cash flows from operations
of the homegenius segment are not adequate to fund all of its needs, including
the regulatory capital needs of Radian Title Insurance , Radian Group may provide
additional funds to the homegenius segment in the form of an intercompany note
or other capital contribution, and if needed for Radian Title Insurance , subject
to the approval of the Ohio Department of Insurance . Additional capital support
may also be required for potential investments in new business initiatives to
support our strategy of growing our businesses.
Liquidity levels may fluctuate depending on the levels and contractual timing of
our invoicing and the payment practices of our homegenius clients, in
combination with the timing of our homegenius segment's payments for employee
compensation and to external vendors. The amount, if any, and timing of the
homegenius segment's dividend paying capacity will depend primarily on the
amount of excess cash flow generated by the segment.
Ratings
Radian Group , Radian Guaranty, Radian Reinsurance and Radian Title Insurance
have been assigned the ratings set forth in the chart below. We believe that
ratings often are considered by others in assessing our credit strength and the
financial strength of our primary insurance subsidiaries. The following ratings
have been independently assigned by third-party statistical rating
organizations, are for informational purposes only and are subject to change.
See "Item 1A. Risk Factors-The current financial strength ratings assigned to
our mortgage insurance subsidiaries could weaken our competitive position and
potential downgrades by rating agencies to these ratings and the ratings
assigned to Radian Group could adversely affect the Company" in our 2020 Form
10-K.
Ratings
Subsidiary Moody's (1) S&P (2) Fitch (3) Demotech (4)
Radian Group Ba1 BB+ BBB- N/A
Radian Guaranty Baa1 BBB+ A- N/A
Radian Reinsurance N/A BBB+ N/A N/A
Radian Title Insurance N/A N/A N/A A
(1)Based on the July 14, 2020 update, Moody's outlook for Radian Group and
Radian Guaranty currently is Stable.
(2)Based on the April 28, 2021 update, S&P's outlook for Radian Group , Radian
Guaranty and Radian Reinsurance is currently Stable.
(3)Based on the May 3, 2021 release, Fitch's outlook for Radian Group and Radian
Guaranty is currently Stable.
(4)Based on the May 20, 2021 release.
Critical Accounting Estimates
As of the filing date of this report, there were no significant changes in our
critical accounting estimates from those discussed in our 2020 Form 10-K. See
Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for
accounting pronouncements issued but not yet adopted that may impact the
Company's consolidated financial position, earnings, cash flows or disclosures.
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